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Bond Report: 2-year Treasury yield carves out another 2018 high, 10 year slips, as Fed’s two-day meeting gets under way

Most Treasury yields drifted lower on Tuesday, with the 10-year note slipping back from the 3% level it briefly touched in the prior session, as investors prepared for this week’s Federal Reserve decision.

The exception was the 2-year rate, which continued to climb on expectations for the Fed’s near-term policy moves. The rise in the 2-year rate led to a shrinking spread against the 10-year yield, a possible sign of worries about the economic outlook.

What yields are doing

The 2-year Treasury note yield BX:TMUBMUSD02Y rose 3.9 basis points to2.768% from 2.729% Monday afternoon. That’s the highest since Dec. 12, 2018, based on 3 p.m. levels according to Dow Jones Market Data.

The yield on the 10-year Treasury note declined 3.8 basis points to 2.957% from 2.995% at 3 p.m. Eastern on Monday. The yield is still at its second-highest level of this year. On Monday, the benchmark briefly edged above 3% for the first time since Dec. 3, 2018, according to Tullett Prebon data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.026%

 declined 5.4 basis points to 3.006%, down from 3.06% late Monday. Monday’s level was the yield’s highest since March 6, 2019.

What’s driving the market

With the Federal Reserve kicking off a two-day policy meeting on Tuesday, policy makers are widely expected to deliver an outsize 50 basis point, or half a percentage point, interest rate increase as opposed to the typical quarter-point move. They’re also expected to announce a plan to rapidly shrink the central bank’s nearly $9 trillion balance sheet.

The Fed is seen moving aggressively as it struggles to rein in inflation running at its highest in four decades.

Read: Fed’s half-percentage point rate hike seen baked in the cake

Data released on Tuesday showed U.S. job openings climbed to a record 11.55 million in March and the number of people quitting also hit an all-time high, in another sign of a historically tight labor market. Meanwhile, factory orders were up 2.2% last month.

Meanwhile, the yield on the 10-year German bond
TMBMKDE-10Y,
0.971%
,
known as the bund, arguably the most important financial instrument in Europe, reached the 1% level on Tuesday for the first time in nearly seven years. It had traded in negative territory as recently as March.

The Reserve Bank of Australia raised its official cash rate for the first time since November 2010 on Tuesday as it seeks to tame inflation running at its highest in 20 years. The RBA raised its official cash rate to 0.35% from a record low 0.10%, a larger-than-expected move, with the RBA signaling more increases likely in coming months.

What analysts say

“As long as inflation is well above target and the labor market still extremely tight, the logic of tighter financial conditions and slower growth is hard to avoid. The more resilience that activity and equity markets show, the higher rates will likely need to go,” said Goldman Sachs & Co.’s Dominic Wilson, Kamakshya Trivedi and Zach Pandl.

“Continued Fed hawkishness—both an increasing embrace of 50bp moves and renewed focus on QT—have helped to push real and nominal yields to new highs,” they wrote in a note Tuesday.

See: Powell wants to get rates closer to neutral. But what’s that? Think between 5% and 6%, former top Fed staffer says

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